19th March 2012
Bill McQuaker, head of equities at Henderson Global Investors, believes that Japan may yet surprise investors positively. He points out that there is some foundation for the recent strength of the Japanese market, in particular, the weakness of the yen. He adds that people have largely given up hope on Japan and therefore there is scope for some re-rating of Japan's export-dominated market if the global economic picture improves.
Certainly, sentiment remains widely negative on the region: "High energy prices remain one of the headwinds facing Japan. The bill for imported oil, gas and coal needed to generate the power previously supplied by nuclear plants was reflected in January's record setting current account deficit. That, allied to the glacial pace of reconstruction work and mounting speculation the current administration is already in "lame duck territory," prompted investors to pull USD443 million from Japan Equity Funds, the most since mid-December."
But, the article points out, investors and fund performance are heading in different directions, with returns from Japan funds still robust.
It is easy to see why sentiment remains weak. The Japanese debt situation is dire, as this Reuters piece points out: "It's scary when you think what could happen if there's triple-selling of bonds, stocks and the yen. The chance of this happening is bigger than markets think," says a senior official."
The debt situation is hair-raising: "The government borrows more than it raises in taxes, and its debt pile amounts to two years' worth of Japan's economic output, the highest debt-to-GDP ratio in the world.
The thing that might save Japan is growth. It is in the heart of Asia, trade with higher growth countries such as China is increasing and economic growth projections are robust. The IMF predicts that Japan will grow 1.7% in 2012, only just behind the US (1.8%), well ahead of the UK (0.6%) and a long way ahead of the Eurozone (-0.5%).
As the performance of the stockmarket has made clear for some time, Japan's economy is not the same thing as its corporate sector. Japan undoubtedly faces enormous problems and a weakening yen will not help investor returns. But sentiment is so poor that if the economic environment turns out to be better than expected, there could be a significant rally. Japan is the ultimate red or black play on global economic strength.
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